TTM Technologies Inc (TTMI) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to the TTM Technologies third quarter 2010 financial results conference call.

During today's presentation, all parties will be placed in a listen-only mode.

Following the presentation, the conference will be open for questions.

(Operator Instructions).

This conference is being recorded today, November 4, 2010.

We will now review TTM's disclosure statement and I would like to turn the conference over to Diane Weiglin, Executive Assistant with TTM.

Please go ahead, ma'am.

During the course of this call, the Company will make forward-looking statements subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

Such risks and uncertainties include, but are not limited to, fluctuations in quarterly and annual operating results, the volatility and cyclicality of various industries that the Company serves, and other risks described in TTM's most recent SEC filings.

The Company assumes no obligation to update the information provided in this conference call.

The Company also will present non-GAAP financial information in this call.

For a reconciliation of TTM's non-GAAP financial information to the equivalent measures under GAAP, please refer to the Company's press release, which was filed with the SEC and which is posted on TTM's website.

I would now like to turn the call over to Mr.

Kent Alder, President and Chief Executive Officer.

Please go ahead, Kent.

Thank you, Diane.

Good afternoon and thanks for joining us for our 2010 third quarter conference call.

Joining me on today's call are TTM's CFO, Steve Richards, and Canice Chung, CEO of our Asia-Pacific Region.

I will begin with a review of the business, Steve will follow with a review of our financial performance, and then we'll open the call to your questions.

I'd like to begin with a few highlights from the third quarter.

We recorded very strong third quarter results, achieving record revenue and profitability and exceeding our guidance.

Net sales increased 15% sequentially to a record $357.8 million.

GAAP net income attributable to stockholders grew sequentially to $29.1 million or $0.36 per diluted share which included a foreign exchange gain and a true tax up that contributed $0.04 per diluted share.

Non-GAAP net income increased sequentially 75% to $35 million or $0.43 per diluted share.

Gross margins increased to 22.5%.

The combination with Meadville was highly accretive to GAAP earnings, adding $0.15 per diluted share this quarter.

Integration of the two companies is making excellent progress.

I will share additional details with you shortly.

Our results for the third quarter demonstrate the strength of both our North America and Asia Pacific operations.

Our sales growth was driven by continued solid demand from our OEM customers in Asia, Europe, and the United States.

Gross margin improved 200 basis points from the adjusted level for the last quarter.

ASPs also increased sequentially.

Additionally, we are continuing to experience high capacity utilization and healthy backlogs.

The integration of TTM Asia Pacific is on target and producing results sooner than expected.

As we continue to refine the integration process and incorporate the best practices of both companies, we are more confident than ever that our combination provides compelling growth opportunities.

We are very pleased with the contribution the Asia Pacific operation made to our performance in the third quarter.

In a short period of time, this performance has validated our strategy for expanding our scale, our global reach, and the breadth of our end markets.

We are seeing the evidence of how well the combination is working right now and we are confident there is more upside to come.

We are joining these businesses to maximize results, keeping the best elements of both companies in place.

We are achieving the objectives we outlined at the time of the combination including revenue growth and market expansion.

Now I'd like to review the results of our operating segments for the third quarter.

Our North America segment includes our US operations as well as our Shanghai backplane facility, since it is managed in conjunction with these operations.

Our Asia-Pacific segment includes our printed circuit board manufacturing facilities in Hong Kong and China.

The North America segment recorded third-quarter sales of $148.3 million compared with $138.9 million in sales in the second quarter.

Gross margin for this segment was 21.4% in the third quarter compared to 20% in the second quarter.

Third quarter operating segment income, before amortization of intangibles, was $17.1 million compared to $6.2 million in the second quarter.

Operating segment income for the second quarter reflected charges associated with the Meadville transaction and restructuring initiatives of $7.9 million.

Excluding these charges, second-quarter operating segment income was $14.1 million.

The Asia-Pacific segment had sales of $211.5 million in the third quarter compared to $173.1 million in the second quarter.

Gross margin for this segment was 23.2% in the third quarter compared to 17.1% in the second quarter.

Third quarter operating segment income, before amortization of intangibles was $32.2 million compared to $15.8 million in the second quarter.

In the second quarter we recorded a $6.7 million fair value adjustment on inventory acquired in our combination.

Excluding the inventory adjustment, second quarter operating segment income was $22.4 million.

Now moving on to our end markets, networking communications is our largest end market.

In the third quarter, this end market represented 36% of sales compared to 32% of sales in the second quarter.

We saw broad based strength from most of our customers in this segment.

The key drivers for growth in this end market are Internet and wireless infrastructure for enterprise and service providers.

We anticipate sales to this end market will be lower in the fourth quarter following a surge in the third quarter.

Computing, storage, and peripherals is our second largest end market and represented 21% of sales in the third quarter versus 25% in the second quarter.

We have experienced solid growth in this segment throughout the year with growth drivers such as touchpad tablets.

This quarter was down primarily due to a component shortage for a key customer.

But we expect the segment to be up slightly in the fourth quarter and continue to grow, be a growth market for us in the future.

The aerospace/defense end market represented 17% of sales compared to 19% in the second quarter.

On an actual dollar basis, sales to this end market increased slightly for the quarter.

We continue to support a diverse mix of programs for domestic defense, foreign military sales, and commercial aerospace, and we are involved in many new programs that will also drive future growth.

We anticipate continued stability in the fourth quarter.

The Asia-Pacific segment has minimal sales to this end market.

The cell phone end market represented 11% of sales in the third quarter compared to 10% in the second quarter.

Customers in this end market are serviced by our Asia-Pacific operation.

Strong demand for Smart phones in China and the transition to 3G are driving growth in this segment.

We expect to see growth in this segment in the fourth quarter as well as long term.

The medical, industrial, instrumentation end market was 9% of sales in the third quarter which was consistent with last quarter.

We experienced increased sales from nearly all our major customers in this segment.

We expect sales to be up in the fourth quarter and to have stable, ongoing demand.

The other end market represented 6% of sales in the third quarter compared to 5% of sales in the second quarter.

Included in this end market are automotive products, consumer products, office products, and a host of other products.

Our top five customers comprised 28% of sales in the third quarter consistent with last quarter.

In alphabetical order, our top five OEM customers were Apple, Cisco, Ericsson, Huawei and IBM.

None of these customers represented 10% or more of net sales in the third quarter.

Lead-times for our North American segment are primarily at six to eleven weeks with good demand in our facilities.

Order levels for the Asia Pacific segment reflect healthy demand with lead times in the range of four to six weeks.

So in summary, we are very pleased with the performance of the Company and we remain on track with our growth strategy as a global Company.

Our operations in both North America and Asia Pacific are performing well and gaining market share.

We are confident that our measured approach to integration will yield highly favorable results over time.

Our focus on advanced technology products is helping to drive our strong results.

To support our future growth, we will continue to fund our expansion internally and maintain our focus on cash flow

Our global company footprint, advanced technological capacities, diversified customer base, and the growing end markets we serve give us confidence that we are well positioned for continued growth.

I'll now turn the call over to Steve to review our financial performance for the quarter.

Thanks, Kent, and good afternoon, everyone.

Before I begin, I'd like to remind you that we completed our combination on April 9th, ten days into our second quarter.

The inclusion of a full quarter of results for the third quarter affects the comparisons I'm going to discuss.

Third-quarter net sales of $357.8 million increased $47.6 million or 15% from second quarter net sales of $310.2 million due to continued strong demand across our end markets.

Gross margin for the third quarter of 22.5% increased from second quarter gross margin of 18.4%.

Included in cost of goods sold in the second quarter was a $6.7 million fair value adjustment on inventory acquired in our combination.

Excluding this increased expense, our gross profit margin for the second quarter would have been 20.5%.

Selling and marketing expense was flat at $9.1 million in both the second and third quarters.

As a percentage of net sales, however, selling and marketing expense in the third quarter decreased to 2.5% of sales from 2.9% in the second quarter.

Third-quarter G&A expense decreased to $21.9 million or 6.1% of net sales from second quarter G&A expense of $25.3 million or 8.2% of net sales.

Second quarter G&A expense included $7 million in costs related to the Meadville transaction.

We recorded $428,000 in transaction costs in the third quarter.

We are not expecting meaningful transaction costs in the fourth quarter.

Amortization of intangibles decreased to $3.7 million in the third quarter from $4.6 million in the second quarter.

Operating income for the third quarter was $45.7 million compared to $17.4 million for the second quarter.

Excluding transaction costs and the fair value adjustment on inventory, second quarter operating income was $31 million.

Interest expense increased to $6.7 million in the third quarter from $6.4 million in the second quarter.

The increase in this expense is due to the inclusion of a full quarter of TTM Asia Pacific's results in the third quarter.

Other net includes a foreign exchange gain of approximately $1.8 million of $0.02 per diluted share.

Our effective tax rate decreased to 22.7% in the third quarter from 39.4% in the second quarter.

The third quarter tax rate fell due to refinements in the full year forecast and a true up to the expected effective full year tax rate of approximately 26%.

This true up contributed about $0.02 per diluted share to our third quarter EPS.

We have partners who hold minority interests in three of our Chinese companies.

Net income attributable to these minority investors was $3.1 million in the third quarter compared to $1.8 million in the second quarter.

Net income attributable to stockholders in the third quarter was $29.1 million or $0.36 per diluted share compared to second quarter net income of $4.9 million or $0.06 per diluted share.

Third quarter non-GAAP net income attributable to stockholders was $35 million or $0.43 per diluted share.

This compares to second quarter non-GAAP net income attributable to stockholders of $19.9 million or $0.26 per diluted share.

Non-GAAP net income attributable to stockholders, add back amortization of intangibles, stock-based compensation expense, non-cash interest expense, asset impairment and restructuring charges, inventory adjustments, costs related to the transaction, and miscellaneous closing costs, as well as the income tax effects related to these expenses.

Adjusted EBITDA, which adds back the controlling portion of depreciation and other expenses, as well as asset impairment charges was $62.1 million for the third quarter or 17.4% of net sales, compared with second quarter adjusted EBITDA of $32.6 million or 10.5% of net sales.

Cash and cash equivalents at the end of the third quarter totaled $164.2 million, a decrease of $49 million from $213.2 million at the end of the second quarter.

During the third quarter we repaid $58.5 million on our revolving credit facility.

Net debt was $391 million at the end of the third quarter.

Cash flow from operations in the third quarter was $28.2 million.

Capital expenditures for the third quarter were approximately $17 million, including $14.4 million for the Asia-Pacific region.

Depreciation for the third quarter was $14 million, excluding the non-selling portion.

As Kent noted earlier, the Company expects to use cash flow from operation to fund capital expenditures and other growth initiatives.

We anticipate that solid business conditioned will continue through the fourth quarter.

We expect fourth quarter revenue to be in the range of $351 million to $367 million.

We expect GAAP earnings attributable to stockholders in the range from $0.28 to $0.35 per diluted share and non-GAAP earnings attributable to stockholders in the range of $0.35 to $0.42 per diluted share.

This is based on a diluted share count for the fourth quarter of approximately 81 million shares.

The foreign exchange gain and tax rate true up discussed earlier contributed abut $0.04 per diluted share to our third quarter results.

These items are not expected to recur in the fourth quarter.

Our fourth quarter gross margin is expected to be in the range of 21% to 23%.

We expect that SG&A expense will be about 9% of revenue in the fourth quarter.

We recorded combined amortization of intangibles of about $3.8 million.

We expect our blended tax rate to be approximately 25% in the fourth quarter.

With that, I'd like to open the call to your questions.

(Operator Instructions).

Matt Sheerin, Stifel Nicolaus.

Thanks, and good afternoon, everyone So just a couple of questions.

On the revenue trends in the quarter, you said that the computing sector was down and that was primarily because of a component issue at a customer.

Did you also see some of the downdraft that some other suppliers of computing saw, some sort of correction, or was it really just that one customer?

Matt, this is Kent.

It was mainly just one customer.

It wasn't any broad based issues in the supply chain, just mainly the result of one customer.

And is that -- so is that business typically down in the fourth quarter because you build sort of first half of the quarter and then it trails off?

And is it going to be up because of just catch up with that component issue?

It's never one thing when you look at end markets.

It always is a combination of things.

Certainly we caught up with the component shortage.

There is some little bit of seasonality in that when you get to the end of the year and so forth, but I think we'll be okay into the fourth quarter.

Okay.

And I know that you're involved in some tablet programs.

Could you just talk about the opportunity in tablets with one of your top five customers, but also other customers given your technology that you have?

First of all, let me go back and make sure that everyone understands that our strategy has always been around advanced technology.

I mean that's kind of been the strategy from the beginning of TTM and it certainly fits with Asia Pacific strategy And when you look at where advanced technology is going, it's to service kind of the Smart phones, the touchpads, the Internet infrastructure with enterprise and service providers as the volume across the Internet increases.

So that's the opportunity for growth in our business and that requires a lot of technology.

So we're investing in that technology to support that touchpad and smart phone technology as well as the expansion in Internet service providers and enterprise providers.

So a lot of that product will be produced in Asia.

So Canice, did you have any additional comments to the ones that I've already mentioned?

Since the touchpad products on both the mobile telephone as well as on the tablet for APC has been established, there's no doubt that we are seeing more opportunities from various customers.

We are seeing a lot of design change in his.

And one thing that match very much with the long term strategy of TTM is that we are (inaudible) technology that the touchpad, the device that they require on the new type of HDI (inaudible) capacity.

(Inaudible) all these developments looking ahead, not only on today.

Okay, and just lastly, could you update us on your capacity expansion plans?

I know you've been adding capacity in Asia where you're pretty full right now.

Could you update us on the timeline and then also how the CapEx rolls out over the next few quarters?

Yes, let me make a few comments about our CapEx.

We're looking at a CapEx of about I think $4 million in North America for the fourth quarter and something like $38 million from Asia Pacific.

And that's referenced to the CapEx expansion that you just mentioned.

As we look forward in North America, our CapEx will be a little higher when you go to 2011 due to the fact that we have consolidated our footprint in North America over the past couple of years and been able to reallocate some equipment.

So it will be little higher, but mostly focused on technology in North America.

And then in Asia Pacific, we'll continue to invest in the expansion and to capitalize on the growth opportunities.

And I think, Matthew, you referenced kind of the immediate expansion that we're doing in a couple of our facilities.

And Canice, I'll let you bring everybody up to date with the expansion there.

By the end of December, our capacity were up by about 10% already.

But this is only part of the expansion plan that we've been mentioning about on both of our (inaudible) plants.

We expect by next quarter the capacity will be up by another about 8% to 10% again.

Another important factor is that our selling price has been trending up further by taking more high margin products like (inaudible) we have been running before that we should be able to have capacity to accommodate about 900 million in Asia Pacific in the next year on an annualized basis.

Could you give us that number again?

I missed that.

It will be having a capacity on an annual basis to 900 million in Asia Pacific.

900 million?

Okay.

Yes, 900 million there.

In the US when we look at our available capacity, walls and so forth, we have expanding walls, we're close to 800 million, so we have a little further ways to go.

But one of the key things that we try to do when we expand is make sure that we match the expansion with customer demand.

Because as you expand, you want to be able to feel that capacity as rapidly as you can.

And then on the other side, you want to make sure you have the capacity onboard in time to service customers.

So I think both in North America and Asia Pacific, the management teams have done just an excellent job matching capacity expansion with demands from customers.

Okay.

And just lastly a quick question on the tax rate, Steve.

I know it was down, you guided around 25%.

Is that a good number to use going forward?

I think obviously next year will depend a lot on the shift of work and the mix we get.

But I think 25% to 27% for next year sounds really dependable.

As I said, 25% for the fourth quarter in your modeling.

Okay, thanks a lot.

Thanks, Matt.

Shawn Harrison, Longbow Research.

Hi, everyone.

A few questions.

The first just in terms of this incremental capacity coming online, how is that going vis--vis the cross selling that you're trying to do with the North American customers?

Maybe you could update on the progress just in terms of the cross feeling as new capacity comes online?

Yes, thanks, Shawn.

Our comment on our cross selling, I mean that is happening.

It's happening at a much maybe slower rate than we anticipated, but we're going through the cross selling process in a very methodical, disciplined way so that we make sure we have a win/win situation for our customers.

So for 2010, we're laying the foundations and making sure we approach our customers in a very I guess win/win type approach.

So while it's happening, it will -- most of the cross selling will be taking place in 2011 and probably towards the end of the year.

Now having said that on the cross selling, the demand that we're seeing from existing customers is -- you want to make sure you have enough capacity to handle demand from existing customers.

So as we look at the smart phone opportunity and the touchpad opportunity and the opportunities throughout the other end markets, we think there's plenty of demand and we have still the cross selling opportunities ahead of us.

Okay.

And then I think it's been mentioned a few times here, just higher ASPs.

If you could talk about the ASP environment, is that just because of mix?

Or are you raising prices to offset rising commodity costs?

And too, maybe you could just talk about the laminate and chemical and everything else environment.

On the ASPs, if you look just at North America, our pricing went up about 2.5% quarter over quarter.

And the marketplace is pretty healthy, so I think we're being able to negotiate well with customers.

But I think a lot of that came through the product mix.

We continue to focus on advanced technologies and so forth.

And I think with Asia Pacific, much the same.

Our ASPs for the first half of 2010 were somewhat depressed and then as the market picked up and we had some material costs come into play, we were able to pass some of that material cost onto our customers, not all.

But again, it becomes a product mix issue.

And as you look at the advanced technologies and the fact that we are one of the leading customers that get into those in the early stages of product development, that enables us to provide a lot of value to our customers As we provide value, we roll with some higher prices.

So the last half of the year, our ASPs were higher by about 7% when you look at ASPs in the third quarter compared to the first half of the year in Asia Pacific.

So on the material front, we'll probably see some increases in material due to commodity pricing in the near term, probably into the first quarter and so forth.

But it seems like we talk about material, commodity prices, increases every quarter for the last three or four years.

So this is nothing new and I think when you look at our performance, you can see that we're able to manage through some of the material price increases.

Again, it comes back to our strategy and the end markets that we serve, the technology that we have to be able to maintain our margins or improve our margins in spite of some material cost increases.

And some of that we're able to pass onto customers.

Not all, but some of it gets passed on and then some of it we find ways to be more efficient and continue to execute our advanced technology plan.

And then just one final question for Steve.

Interest expense for the September quarter, Steve, kind of what are you anticipating?

About $6.3 million in actual interest expense and another about $400,000 of amortization of debt issuance costs which is bundled into interest expense in our 10-Q.

Okay.

Thank you so much, everyone, and congrats on the increase so far.

(Operator Instructions).

Amitabh Passi, UBS.

Hi, thank you, and congrats on a good quarter.

Steve, first question for you.

Incremental operating margins in the quarter pretty strong, I mean my numbers show they're almost at 40% which was kind of what you were doing just with the North American business.

I thought the cost structure was much more variable with your Asian business.

So perhaps some guidance how we should be thinking about incremental margins for the blended entity as we look forward?

Yes, we've done some analysis on incremental margins now that we've kind of stabilized our combined footprint with the Asian operations And they are coming in at that 35% to 40% incremental gross margin which is higher than I initially expected.

So I think this quarter was quite strong obviously in our overall performance.

But I think we're seeing that 35% to 40% incremental gross margin.

Okay, great.

And then as you bring on additional capacity either north America or Asia, any anticipation of temporary hiccups just as you bring on incremental capacity online?

Or do you still feel pretty comfortable with the 35% to 40% as we look out over sort of the short to medium term?

Yes, we are certainly well positioned.

We're in touch with customers on an ongoing basis to make sure we match our capacity expansion to meet their needs, working hand in hand with partners or with customers on a partnership basis.

So we're very comfortable with the CapEx expansion that we have going on and when you look at the growth, and lot of the CapEx, that takes place over in Asia Pacific.

So I think we're in very good shape there.

Canice, do you want to add some more color to my comments?

Like you mentioned earlier, in fact before the capacity expansion, we work well with our customers and we'd like to align to expand quicker or slightly slower according to all the future requirements there.

And just one final question on a couple of your end markets.

Kent, I think you touched on this, but networking communication very strong sequentially quarter over quarter.

Could you maybe shed a little more light where that trend came from?

Was there any one-time sort of events?

And then similarly on your computing segment, I'm a little surprised we aren't seeing a little more robust performance given you've got one top five customer with a very hot selling product.

So perhaps you could just maybe touch on those two segments?

I think on the networking and communications segment, there was some pent up demand in the prior quarters.

When you look at some of the customers and some restrictions put on products and so forth.

So we had a little bit of a bubble in say the second quarter relative to the third quarter.

So that probably goes back to more normal ordering patterns and so forth.

On the computing and storage, I mean clearly we are involved in the right end products with our customers.

And we talked about numerous customers beyond just a few, so we are in the right segments there.

But that will take place over longer period of time and clearly the capacity we are bringing on will match with that.

But we still are very optimistic about the upside with computing and storage.

Okay, great.

Thank you.

Thank you.

And at this time I would like to turn the conference back over to Mr.

Alder for closing comments.

Okay, sure.

Thanks, everybody.

We appreciate your interest in TTM.

Just a few comments about where we're at with the industry today.

And we go back to the 1980s when I started in this business, and the products that drove the business back in the 80s were kind of circuit boards for watches, video games, automotive products and so forth.

Then you move into the 90s and you had the personal computers that drove the market.

In 2000, the decade, it was laptops, infrastructure products, cell phones and so forth.

And today we're involved in touchpad tablets and smart phones and more Internet bandwidth requirements, so the communications segment.

So we have matched our business and feel very optimistic about there we're going with the Company.

The combination of our two great companies has been a transforming event.

It's working now.

As a global company, we're able to participate in the growth of Asia, we'll still maintain our leadership position in North America, so we're very well positioned as a company.

We appreciate everyone for joining the call today.

We look forward to continuing conversations to explain the opportunities we have as a combined company.

So thank you, everyone, and we will talk to you next quarter.

Ladies and gentlemen, this does conclude our conference for today.

If you'd like to listen to a replay of today's conference, please dial 303-590-3030 or 1-800-406-7325 with an access code of 4377086#.

We thank you for your participation and at this time you may now disconnect.